Germany’s selfishness hangs over its partners. Perhaps it is time to consider radical changes within the EC.

Germany’s selfishness hangs over its partners. Perhaps it is time to consider radical changes within the EC.

This wonderfully clear article has been taken from the South China Morning Post. It is a problem that could only grow bigger and worst.

Germany’s massive exports to the euro zone comes at the expense of its weaker partners and urgent change is needed to help bridge the gap

PUBLISHED : Monday, 24 March, 2014, 4:45am

David Brown

Illustration: Lau Ka-kuen

The euro zone reads to some like a classic tale of two economies.

Germany has the heroic plot, while the rest of the euro zone has all the makings of a horror story.

The truth is that heroic Germany is deeply flawed, and its selfishness leaves the spectre of recession haunting the weaker euro-zone countries.

Germany’s post-war economic model is built on thrift, productivity and enterprise. German consumers save rather than spend. German industry exports its goods ruthlessly inside the single market, at the expense of its euro-zone partners.

As German trade surpluses swelled, deficits in France, Italy and Spain ballooned. Germany’s current account surplus probably hit a new record in 2013, about US$250 billion, even greater than that of China.

Before the creation of the single currency, the weaker countries now inside it competed against German exports by using currency devaluations to boost trade competitiveness. Since the advent of the euro zone, that is no longer possible.

The adoption of the single currency has only accelerated the pull of capital and productive capacity towards Germany. The car industry provides a clear example. Car producers in Germany enjoy growing success, while the motor industries in France, Italy and Spain slide into decline.

At some stage, this trend must be addressed. Germany’s massive export engine gives it an unfair advantage over its euro-zone partners.

Without a radical change – including a change in consumer behaviour that stimulates the purchase of imports – Germany’s trade surpluses will only get bigger.

Meanwhile zombies, in the form of the mass unemployed, stalk the likes of Spain and Greece. A quarter of the labour force is jobless in both countries.

The young are particularly at risk – youth unemployment rates are as high as 50 per cent. The risks of decay in social cohesion and political stability are clear.

Recovery in the five euro-zone countries bailed out by the European Union and the International Monetary Fund – Greece, Ireland, Portugal, Spain and Cyprus – has been torturous. Deep fiscal austerity cuts, deleveraging and debt deflation have weighed heavily on confidence.

That vital energy has been sapped from the wider euro-zone recovery is also evident in Germany. While growth looks good on the surface, it should be doing much better, considering the scale of stimulus pumped into it in recent years.

Germany’s current account surplus probably hit a new record in 2013, about US$250 billion, even greater than that of China

The massive injection of easy money into the ailing euro-zone economy should have been a policy turbo-charge for Germany. Growth should have gone into overdrive. But it has fired on only three cylinders.

European Commission forecasts recently upgraded German growth expectations to 1.8 per cent this year and 2 per cent for next year. This is not exactly explosive performance compared with the US and Britain, where trend growth rates for both countries are rising above 3 per cent.

The US Federal Reserve and the Bank of England were both much quicker off the mark with dramatic rate cuts. And they both fanned the fires of recovery with quantitative easing – an option the ECB still needs to consider.

Germany could have helped itself to stronger growth if it had shared more of its success with its euro-zone partners.

The euro zone’s economic future should not be determined by the supremacy of comparative advantage and industrial success in one country alone.

Economic prosperity must be spread throughout the 340 million-member market. The euro zone is crying out for fundamental change.

A move to European fiscal union is the next inevitable step.

The single market for goods and monetary union are only two legs of the policy equation. It now needs an extra leg for stability.

Fiscal union and more effective regional redistribution of resources will help to bridge the gap between Germany and the weaker euro-zone countries.

Using German taxpayers’ money to fund social transfers and income support to Greece may be a step too far for German sensibilities.

One Comment

ciriaco Offeddu

March 24, 2014 - 12:57 pm

What I never understood is a Manichean vision of the EC, a kind of ‘You’ re either for me or against me!’ This stances seem moral or religious more than pragmatic, social and political, and so worthy of an attentive scrutiny. Why have I to take a stand following this immature aut-aut? I want to discuss the EC, which must be and remain in good working order like a good mechanism. If the mechanism is not working or working ineffectively, we have to fix it or to change it, simply. The fact that it is impossible to discuss this bureaucratic monster (you’ re either with me or you’ re not, boy!) is at least suspicious and is going to create an insuperable gap between the central European bodies and the local populations. Where is the spirit of the EC? Its aim, its soul? Van Rompuy’s unpleasant face doesn’t represent me. And I don’t want to be represented by Van Rompuy, ever.

ANGELO PARATICO studied textile chemistry and then worked in several textile mills before becoming a salesman of textile machinery in South East Asia. When China opened up, so to speak, in the early eighties he moved to Hong Kong setting his base there. First he had a wife from Hong Kong, two wonderful children, then a second wife from Verona, Donatella Oliboni. He has been living since 1983 in Hong Kong with his family. He freelances with several newspapers in Italy, and with The South China Morning Post in Hong Kong.